BEAUMONT: City’s tangled finances a mess, state declares

District Attorney investigative technicians and FBI agents move some of the near 500 boxes taken from Urban Logic Consultants offices on Wednesday, April 22, 2015. The DA's office and FBI served search warrants at Beaumont City Hall and the offices of Urban Logic.

BEAUMONT'S MONEY WOES

May 2014: A judge rules Beaumont must pay the Western Riverside Council of Governments $43 million plus interest and fees for failing to contribute its share of developer fees for regional transportation projects. The case is awaiting appeal as the liability, which had increased to about $57 million by May 2015, continues growing by about $10,000 a day in interest.

May 2015: California Controller Betty Yee announces a state probe into Beaumont finances after finding significant differences between the city's financial transaction reporting to her office and the city-audited financial statements.

June 2015:City-commissioned report finds the city's controls over cash receipts and cash distributions are "fraught with risks of all types," and need immediate reforms.

November 2015: State controller finds city accounting controls so lacking they were virtually nonexistent.

CITY MANAGER LEAVING

City Manager Alan Kapanicas, who has been on paid administrative leave since mid-June, signed a separation agreement Oct. 8 that will pay him almost $214,000 through Nov. 15, officially capping a 22-year tenure with the city.

The agreement was proposed by Kapanicas' attorney in September. The City Council approved a modified version of it Oct. 6.

A state controller’s office review of Beaumont city finances found that accounting controls were “effectively non-existent,” making it impossible to know whether hundreds of millions of dollars were spent for their intended purposes.

“These kinds of deficiencies are of great concern, especially to the citizens of Beaumont, who rightly expect their city government to safeguard their tax dollars,” Controller Betty T. Yee said in a prepared statement. “However, I am encouraged that city leaders now recognize the need to implement major improvements.”

City Councilman Lloyd White said the state report was an important step toward getting the city back on track.

“It was the good to hear her say that we are doing what we can to address the concerns raised in the report,” White said.

The state review began in May after the discovery of significant differences between the city’s financial transaction reports to the Controller’s Office and its audited financial statements over two fiscal years.

The month before, FBI and the Riverside County District Attorney’s Office had served search warrants at Beaumont City Hall, at the home of City Manager Alan Kapanicas and on officials of the Urban Logic Consulting firm. The investigators also searched the offices of Urban Logic, which for years provided several city workers – including the public works and economic development directors – as contract employees.

No criminal charges have been filed.

The raids spurred the exodus of Kapanicas and William Aylward, who served as the city finance director, assistant city manager and in other city positions for more than 20 years. Kapanicas, on leave since mid-June, will be off the city payroll after Nov. 15.

• The city failed to properly account for bond transactions including financing and utility authorities and a community facilities district that together issued $626 million in debt to the city. As a result, the controller’s team could not determine whether the bond proceeds were used for the intended purposes.

• Kapanicas and a former public works director, both principals of outside consultant firms that provided city staff, received fees from bond proceeds for their services. It was unclear whether these services were separate from their responsibilities as city officials. These two officials approved payments to the consulting companies where they were principals, creating conflicts of interests.

Deepak Moorjani served as the public work director while he was a principal with Urban Logic. Kapanicas was a principal with General Government Management Services. Both were part of consulting teams that issued hundreds of millions in debt for public-works projects.

• In 2008, Beaumont obtained a reseller’s permit from the state Board of Equalization, allowing it to purchase items outside the city without paying sales tax, even though the city did not appear to be in the business of selling goods. Beaumont also allowed one of its vendors to use the permit. The arrangement allowed the city to shift sales tax revenues from other jurisdictions by moving the supposed point of sale to within its boundaries.

• The city did not consistently follow its competitive bidding laws. City staff bought equipment or let contracts for public works without competitive bidding, arguing that the vendor was the only source, yet failed to provide documents supporting these claims.

In 2013, the city entered into a no-bid contract with Urban Logic Consultants that allowed engineering projects to be approved through “job cards” rather than open, competitive bidding.

• The city lacked receipts and descriptions for credit card purchases, supporting documentation for loans made to employees, and sufficient records for a loan to a private business. Invoices were missing, including purchases from a construction company totaling more than $1 million.

• For five years in a row, the city ended the fiscal year with material deficits of as much as $10 million. It did not have sufficient revenue to fund existing levels of service. The city said it would cover these deficits with $21.5 million owed by its redevelopment agency. However, the redevelopment agency has been dissolved and it is highly uncertain that amount can be collected.

The state findings add to and confirm a city commission finance review that in July found Beaumont's finances have been so mismanaged that "strong controls are badly needed" to "deter and detect errors, fraud and theft."

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